Saturday, February 20, 2010

The Minsky view of Keynes

I just finished the book John Maynard Keynes by Hyman Minsky. It is a fresh look (circa 1975) at the revolutionary ideas from Keynes' major works, including but not limited to The General Theory.

Minsky believes that the work of Keynes was watered down and absorbed into the classical economic mainstream and the revolutionary ideas were mostly ignored. He thinks a heart attack shortly after The General Theory was published prevented Keynes from defending his work as vigilantly as he would have otherwise.

One of the big ideas in the book is an examination of how Keynes viewed investment decision making in times of uncertainty, and direct relationship between investment, growth, and employment. In A Treatise on Probability, Keynes stressed the difference between risk, which can calculated and assigned a numerical value, and uncertainty, which is incalculable. Uncertainty leads to money hoarding, leading to lower investment and employment.

Minsky fleshed out the ideas in Keynes' work related to lending, interest rates, financial investment and speculation, looking at the psychology that develops in various stages of the business cycle. Combined with the effect of increasing debts and rising asset prices, Minsky was able to tell a story about disequilibrium. The seeds of the destruction of each phase of the business cycle can be explained in terms of the psychology of financial investment and speculation, leading to the Financial Instability Hypothesis.

The book ends with an interesting discussion of Keynes' social philosophy and political aspirations. For Keynes, the trick was to achieve three goals:

  • economic efficiency

  • social justice

  • individual liberty

He believed he had found a way to balance these goals with policy modifications of government action, without going the way of Socialism or Communism. I have great empathy for these goals, though the implementation of the policy prescriptions have not proven to work as Keynes expected.

An epiphany for me was the connection between the work of Minsky and Keynes, and the Kondratiev long wave theory. Kondratiev had described long waves in Capitalism, but did not define the mechanism -- how or why long waves occurred. Minsky's Financial Instability Hypothesis, described how long waves between boom and bust could happen in a system of financial Capitalism. Rational and irrational actors play their parts, with banks, speculators, and workers interacting in fundamental ways. I need to spend some time assembling all the steps into a more coherent whole, but that connection hit me like a sledgehammer.

Wednesday, February 17, 2010

Gold charts 2/1/2010

In all charts, money stock values come from the St. Louis Fed. Gold stocks come from the Gold Council and gold prices from Kitco. These comparisons are for US money stock vs. World gold supply.

Starting with the 1/1/2010 data, I adjusted the estimated gold supply up by 2% to reflect mining output for 2009. This affects the M2/oz chart but does not affect the M2/price chart. I will make further adjustments when I receive updated supply figures from the Gold Council.

Charts do not start at zero to better show changes.

The beginning of February was a slightly better time to buy than January or December.

Saturday, February 13, 2010

Some Krugerrand trivia

The South African Krugerrand was the world's first 1 oz gold bullion investment coin. For a while, it was the most popular gold bullion coin, but has since been eclipsed by the Canadian Maple.

The obverse side has a picture of Paul Kruger, while the reverse side has a picture of a springbok antelope, one of South Africa's national symbols. The rand is the unit of South African currency, hence Kruger-rand. It is minted with no face value, but is legal tender in South Africa, taking on the current market value of spot gold.

Below the antelope image on the right side are the small initials CLS for Coert L. Steynberg, the South African artist who designed the image.

One of the unique features of the Krugerrand is that it is an alloy of only gold and copper, giving a darker, redder tone than other bullion coins, that are usually pure gold or are alloyed with silver in addition to copper. I happen to like the color, but it is purely a matter of personal taste.

One point that confuses some people new to gold investing is that 1 oz bullion coins contain a full ounce of gold despite being alloyed, so a 1 oz 22 karat Krugerrand contains the same amount of gold as a 1 oz 24 karat Maple. It actually weighs a little more than the Maple due to the copper content.

Diameter 32.69mm
Thickness 2.74/2.84mm
Weight 33.931 g
Fineness Au 916.67/Cu 83.33
Gold 31.1035g
Reed edge 220

Wednesday, February 10, 2010

The most frequently counterfeited US gold coin

"The single most counterfeited series of U.S. gold coins is the Indian Head Quarter Eagle. This series accounts for approximately 40% of all counterfeit gold coins received by PCGS."

Read the full article at PCGS...

Saturday, February 6, 2010

Debunking Economics

Debunking Economics, by Steve Keen, is perhaps a seminal work for bringing economics out of the 19th century. Building on the work of Keynes and Hyman Minsky, Keen makes a strong case for leaving static, equilibrium based neoclassical economics behind.

The flaws in classical economic axioms are so obvious, and the predictions so poor, that they are indefensible. Yet, their ideas still dominate academic and practicing economists, with policies that are not just misguided, but harmful to the well being of the world political economy.

The new dynamic models Keen has developed show great promise as a new way to approach an understanding of modern credit based economies. This book ranks near the top of all economic books on my bookshelf.

I was particularly impressed with chapters 10 and 11, which cover financial markets, the efficient markets hypothesis, Irving Fisher's theories before and after the Depression, and Minsky's financial instability hypothesis.

Tuesday, February 2, 2010

Great money supply primer

I stumbled on a great money supply primer on Jesse's Cafe Americain.

In my gold charts, I mainly use M2 for comparisons against gold supply and gold price.

The use of pools of water is an excellent metaphor, and can be applied to money flows more broadly than just money supply (e.g. stocks and other assets).